What is the Difference between Red and Green Inverted Hammer?

By Admin

Posted on December 10, 2024

Now, if you trade, you must already know about candlesticks. However, many people are still confused about the difference between red and green inverted hammer candlesticks.

The confusion arises because people wonder how a bullish candlestick can be red. Additionally, they question how this candlestick can still be considered bullish when there are visible signs of sellers above it.

In this entire article, I will explain the difference between red and green inverted hammer candlesticks. Along with that, I’ll break down the psychology behind them in simple words so that you can understand without any difficulty.

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Table of Content

What is Candlestick in Trading?

First, let’s understand what a candlestick is, as some people might be new to trading. This will help them grasp the concept better.

In trading, three types of candlesticks are formed:

Green Candlestick: This forms when the price moves up after opening and is represented by the green color.
Red Candlestick: This forms when the price moves down after opening and is represented by the red color.
Doji (Colorless Candlestick): This is colorless because the opening and closing prices are the same, indicating indecision in the market.

These types of candlesticks are called Japanese candlesticks because they were invented by the Japanese. A bit of history, but it doesn’t really matter for practical purposes!

Also Read: Hanging Man Candlestick Pattern in Forex and How to Trade

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What is an Inverted Hammer Candlestick?

An inverted hammer candlestick is a single candlestick pattern that can signal a potential reversal in price movement, particularly in a downtrend. It has a distinct shape with a small body, a long upper wick, and little to no lower wick. Here’s how it works and what it means:

Inverted Hammer candlestick

Structure:

Body: The body of the candlestick is small and can be either green (bullish) or red (bearish), but the key feature is the long upper shadow.
Upper Shadow: The upper shadow (or wick) is at least twice the length of the body. This shows that the price moved significantly higher during the period, but sellers managed to push it back down.
Lower Shadow: There is little to no lower shadow.

Also Read: Hammer Candlestick: How to identify and Trade in 2024

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Psychological Explanation:

Buyers’ Push: The long upper shadow indicates that buyers tried to push the price higher, but the sellers took control by pushing the price back down.
Potential Reversal: If this pattern forms after a downtrend, it suggests that the selling momentum may be losing strength. Buyers might be starting to take control, which can lead to a potential bullish reversal.

psychology behind the formation of inverted hammer

3rd step of psychology behind the formation of inverted hammer candlestick

4th step of psychology behind the formation of inverted hammer candlestick

Important Points:

Confirmation: The inverted hammer is not a guaranteed reversal on its own. It needs confirmation in the form of a bullish candlestick in the next trading session to validate the reversal.
Color Significance: While both red and green inverted hammers can appear, a green inverted hammer is considered a stronger signal of a potential reversal because it shows that, despite the selling pressure, buyers were able to close near the highs of the day.

Where to Look for It:

Trend: The inverted hammer is considered a strong reversal signal when it appears after a downtrend, but its effectiveness depends on the strength and volume of the following candlestick.

Also Read: Doji Candlestick: Types and How to Trade with Perfect Entry, Target and Stoploss in 2024

Difference between Red and Green Inverted Hammer?

The color of the inverted hammer candlestick serves only one purpose: it tells us where the close is relative to the open. It doesn’t indicate anything else in the case of a single candlestick.

Aspect	Red Inverted Hammer	Green Inverted Hammer
Body Color	Red (indicating a close lower than the open)	Green (indicating a close higher than the open)
Significance	The candlestick shows that sellers had the upper hand, but buyers tried to push prices higher during the session. It indicates a potential trend reversal, but confirmation is needed.	Indicates that buyers were able to push prices higher, showing potential bullish reversal. The close is higher than the open, making it a stronger reversal signal compared to the red inverted hammer.
Strength of Reversal	Weak reversal signal, especially if the next candle does not confirm the change.	Stronger reversal signal, especially when followed by a strong bullish candle confirming the trend shift.
Market Sentiment	Indicates that the market is still under selling pressure, but buyers might be starting to gain control.	Shows a potential shift from bearish to bullish, with buyers starting to dominate the market.

Conclusion

In conclusion, the red inverted hammer and green inverted hammer both share the same structure but convey different market sentiments. The red inverted hammer signals that sellers were in control, but buyers tried to push prices higher, suggesting potential reversal, though with weaker conviction. On the other hand, the green inverted hammer shows a more bullish sign, where buyers pushed the price higher and closed near the highs of the session, indicating a stronger possibility of a reversal. However, it’s essential to remember that the inverted hammer pattern, whether red or green, requires confirmation from the following candlestick to validate the trend reversal. Both patterns provide valuable insights, but understanding the context and confirming the pattern can help in making more informed trading decisions.

Happy trading and stay informed